Business - Unit 5: Finance - 5.2

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  • 5.2 - Sources of finance
    • When does a business need finance?
      • At start-up - capital for new equipment etc
      • In growth and expansion - to buy new buildings/ businesses
      • During recruitment - recruitment and training costs
      • During marketing - marketing and advertising campaigns
      • To overcome a temporary shortage of finance
    • Types of finance
      • Internal - comes from within the business or from owners
        • No financial cost but usually there is opportunity cost involved - once spent, it cannot be reinvested elsewhere
      • External - comes from outside the business
        • There is usually a cost involved e.g. interest
      • Security - something of value given to an investor as a guarantee: it can be taken as payment if it is not paid back
    • Internal sources of finance
      • Retained profit - profit is kept and used within the business. MT/LT
      • Sale of assets - selling unwanted/ unnecessary items. ST/MT/LT
      • Owners' capital - owners invest their own personal savings. ST/MT/LT
    • External sources of finance
      • Overdraft - bank allows them to spend more money than they have - paid back with daily interest. ST
      • Bank loan - a set amount is borrowed for a set time period. MT/LT
      • Trade credit - goods are not immediately paid for. ST
      • Taking a new partner - part of the business is sold to a partner. LT
      • Share issue - share of ownership is exchanged for finance. LT
      • Crowdfunding - business proposal is published and many smaller investors are attracted. MT/LT
      • Loans from friends and family - needs to be paid back but usually with lower interest. ST/MT
      • Government grant - available for specific purposes, not paid back but time-consuming process. LT

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